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The GFC Legacy: Is There Anyone Left You Can Trust?
The global financial crisis has thrown up so many examples of fraud and financial mismanagement on such a mammoth scale that cases like Enron pale into relative insignificance. Fallout from the GFC has impacted heavily on those who value integrity in business, with their state of confusion equalling the carnage wrought by the crisis itself. Now the release of the 2,200-page report by Anton Valukas, appointed by a US court to probe the reasons for Lehman Brother’s failure in 2008, leaves many again shaking their heads in disbelief. Valukas paints a damning picture, not only of the bank’s top management, but also of other major institutions that have a vital role to play in business everywhere. It is a further blow to the already battered credibility of the entire banking industry.
Central to the Lehman case are its off balance-sheet trades, using devices like “Repo 105”, which enabled it to shift some $US50 billion off its books. These transactions, never disclosed to investors, rating agencies or regulators, are described by Valukas as “an accounting gimmick” and “window-dressing”, making the organization look healthier than it was. Some of his heaviest criticism is levelled at Ernst & Young, the Big Four auditor, for the role it played in Lehman’s bankruptcy, raising again the spectre of Enron and shonky accounts. One experienced US attorney has said that the idea that such a firm would sign off on all this is “absolutely incredible”. He stressed that the auditor had a public duty beyond its client to say to Lehman Brothers, no, you just can’t do that.
Then there’s the question of Lehman’s elite London law firm that also signed off on the controversial transactions. And all this against a backdrop of other major GFC failures, like the key ratings agencies that were missing in action when they were most needed.
Britain’s FSA Targets Cross-Border Fraud
Following the global financial crisis, the spotlight on banks is intense, especially in Wall Street and The City of London. Now Britain’s Financial Services Authority (FSA) has radically stepped up its investigation of overseas banks and companies. With the crisis bringing to light potentially improper or fraudulent behaviour that crosses international borders, the Authority’s enforcement division investigated 30 overseas businesses in 2009, a six-fold increase over the five it looked in to in 2008.
As the Financial Times highlighted on February 2, this information was obtained from Freshfields, a London legal firm, by means of a freedom of information request. Of the 30 businesses involved, overseas companies accounted for 15 per cent, up from 2.4 per cent last year. The increase comes at a time when the FSA has also significantly expanded the assistance it renders to foreign regulators. The Authority received 830 new requests for help in the 2008-09 fiscal year, up 27 per cent from 2007-08. While the FSA has not particularly targeted overseas companies, the increase is a natural outgrowth of the financial crisis, which exposed a number of cross-border frauds and failures and prompted regulators to start working more cooperatively, Freshfields said. “London is a financial centre and governments are under pressure to respond to the crisis. If they are all talking to each other, someone is going to do something,” Raj Parker, one of the law firm’s partners pointed out.
Britain’s rising international focus is being replicated around the world. The US Securities and Exchange Commission (SEC) asked for overseas assistance 774 times during the 2009 fiscal year, an increase of 30 per cent. In London, the FSA went to the Court of Appeal on February 2 to challenge a lower court ruling that limited its ability to gather documents for the SEC after senior officials from both regulators met the previous day to hammer out new areas of cooperation. “The global banking crisis will only have reinforced the resolve of the SEC and [Department of Justice] to hunt down those responsible for such activity. Regardless of the outcome of this hearing, this trend of close cooperation is here to stay and means that both businesses and individuals are at risk of lengthy investigations in both the US and UK,” said Neill Blundell, head of the fraud group at Eversheds, another legal firm.
Global Corruption Index: Which country is rated worst.
The 2009 survey of global corruption carried out by Transparency International, the German-based organization that annually ranks the performance of 180 countries, shows there’s no room for complacency. “At a time when massive stimulus packages, fast-track disbursements of public funds and attempts to secure peace are being implemented around the world,” it says, “it is essential to identify where corruption blocks good governance and accountability, in order to break its corrosive cycle.” Corruption, financial crime, anti-money laundering are the focus of this important survey which puts many developed and emerging countries under the forensic investigation blowtorch.
One country that’s redeemed itself is Australia, which has risen to eighth spot in 2009 from ninth in 2008. It held top spot in 2002, when it was considered the least likely nation in the world to allow corruption. That was before the exposure of dealings by the Australian Wheat Board with the Iraqi Government of Saddam Hussein. Transparency International’s latest Corruption Perception Index (CPI) has New Zealand replacing Denmark in top place. The CPI is a composite index that draws on 13 expert and business surveys to measure the perceived levels of public sector corruption in any given country. In the important regional breakdown of the Index, Australia ranked third for the Asia-Pacific, behind New Zealand and Singapore.
Overall, most of the 180 countries still scored under five on a zero-to-ten scale, with zero perceived as highly corrupt and 10 to mean low levels of corruption. The challenge, therefore, remains undeniable. Highest scorers in 2009 were New Zealand at 9.4, Denmark at 9.3, Singapore and Sweden at 9.2, and Switzerland at 9.0. Australia, Canada and Iceland came in at 8.7. Fragile, unstable states that are scarred by war and ongoing conflict rated lowest, with Somalia at 1.1, Afghanistan at 1.3, Myanmar at 1.4, and Sudan at 1.5.
Another US Ponzi Scheme Hits the Dust
As The Wall Street Journal reported on December 3, a Minnesota jury has found the operator of a $US3.65 billion Ponzi scheme guilty of all 20 counts of wire fraud, mail fraud, money laundering and conspiracy, potentially consigning him to life in prison without parole. The racket dates back at least a decade.
At the time that 52-year-old Tom Petters was arrested in October 2008 and indicted two months later, the allegations against him amounted to one of largest Ponzi schemes in US history. But New York financier, Bernard Madoff, confessed a few months later to a much bigger fraud – an estimated $US65 billion – and is now serving 150 years in prison. Petters, a gregarious businessman, started out selling stereo equipment in high school and later became a liquidator of overstocked goods before his company ventured into retail-based fraud.
The US government has accused him of promising fat returns to investors who lent him money to purchase surplus merchandise, then resell it to big-box retailers such as Wal-Mart Stores and Costco Wholesale. But there were no such transactions and profits funded his ‘extravagant’ lifestyle, which included lavish homes in several states, a number of expensive boats, Mercedes cars and also a Bentley. Moreover, he acquired a number of legitimate companies, including Polaroid Corporation and Sun County Airlines. It all came crashing down in late 2008 when longtime Petters Company employee, Deanna Coleman, approached the US Attorney in Minneapolis. She laid out the nature of the fraud and her role in it, and agreed to wear a recording device that picked up damaging conversations with her boss and others in the following days. She later pleaded guilty to conspiracy to commit fraud, and testified for the government in the trial. In all, three co-workers and four business partners pleaded guilty to aiding the scheme and several testified against Petters.
During the trial, 42 government witnesses testified, compared with 12 called by the defence. Ms. Coleman’s tape recordings were key to the prosecutors’ case. In one of the tapes, Petters is heard saying, “This is one big [expletive] fraud.”
Guarding Against Corporate Fraud
The Indian outsourcing firm, Satyam Computer Services, which was the subject of the country’s biggest corporate fraud scandal in January 2009, has been hit with a tranche of supplementary charges. According to India’s Central Bureau of Investigation, the extent of the total fraud now stands at around $US3 billion. What the Bureau has revealed provides a salutary warning to any company in virtually any country that this could be happening right under your nose. If you suspect that might be the case, call in experienced professionals without delay. A wide variety of methods, ranging from detailed transactional analysis to computer forensics can be used by these experts to give you a clear picture of reality.
The original charges against Satyam’s former chairman revolved around his admission that he had misrepresented the company’s financial condition by inflating assets and understating debts. This included a fictitious cash balance of more than $US1 billion. He stunned India’s financial world when he made his confession. At the time, Satyam was rated as India’s fourth-largest information technology services group by revenue, with world-wide clients like General Motors, Nestlé and General Electric.
The new charges show that others at Satyam had been creating fake customer identities and generating fake invoices against them to boost revenue figures. They had also forged board resolutions and obtained unauthorised loans that were used to buy properties. Investigators have found over 1,000 such properties, purchased by the accused with the siphoned funds and involving 2,430 hectares of land as well as housing plots and building space.
Seven Danger Areas To Watch For In A Hi-Tech World
With new technologies being introduced into your business environment at a dazzling pace, it’s easy to overlook the extent to which the divide between your employees’ work time and their private lives and ambitions is increasingly blurred. Some corporate managers wonder whether they can any longer define where it is. One American CEO recently observed that it’s more like a seismic fault line that’s expanded into an ever-widening corridor.
Here are a number of areas where you need to be aware of what your employees are doing. If you’re not sure how to monitor their activities, call in a team of experienced professionals who are sensitive to the privacy and legal issues sometimes involved. Using sophisticated equipment and new techniques like computer forensics, they will analyse all of your electronic traffic, access to your databases, incoming and outgoing mobile and text communications, business transactions and other relevant dimensions of your corporate operations in order to provide you with a map of what’s really going on. Once that’s established, they can also help you grapple with what needs to be done.
1. The Mobile Employee.
The widespread use of 3G wireless broadband means that much of what used to be done in your office can now be carried out almost anywhere. Smartphones, for example, have all but replaced the need for an office with a fixed line. While BlackBerry has contributed greatly to satisfying our addiction to mobile email, the market for staying connected while you’re out and about has expanded enormously. In a similar way, notebooks are increasingly coming with built-in 3G wireless for internet access on the road. If you have a fair percentage of your staff constantly outside your office you need to know whether you’re getting value for money from them, be it in customer relations terms or through recruiting new clients. Do you have any idea where they are when they’re outside your office? There are ways of checking.
Ten Ways to Protect Against Payroll Fraud
Australia’s Daily Telegraph ran a useful report in mid-November on payroll fraud, a form of financial crime that is often particularly difficult to detect. One victim, a whitegoods and electrical retailer, managed to retrieve the $A20 million stolen by its payroll officer, but most companies never see their money again. And the crooks involved don’t always gamble the proceeds away. In this case, the officer invested the money in property. If you want to avoid being targeted by a clever operator it pays to bring in a team of experienced professionals who use state-of-the-art technology, like computer forensics, to help you secure your system.
An Australian expert has stated that while cases of payroll fraud have increased in the past year, it is impossible to be sure what is happening. Estimates indicate that around 90 per cent of cases go undetected. That should set alarm bells ringing.
Clearly, top priority is to choose the right person for the job in the first place, which means careful screening and checking of references and background. Interestingly, the majority of those caught for payroll fraud have no criminal history as such. But they may have committed similar acts in the past, then been encouraged by their employer to quietly move on – without prosecution. Whether money is paid back or not, many companies avoid embarrassment by not reporting fraud to police. This merely passes the problem on to other employers.
The Contagion of Fraud: Best Nipped in the Bud
Only a few months ago, mention of the name Bernard Madoff brought to mind America’s biggest-ever Ponzi scheme. The sheer scale of the financial fraud involved and the audacity with which it was carried out dazzled most people. Fast forward to now and Madoff as an individual has largely faded from sight. Instead, it’s the ramifications of what he did that keep throwing up his name. The latest is the revelation that the former head of Optimal, the Geneva-based hedge fund investment wing of Satander, the Spanish bank, has been charged with criminal mismanagement of client funds placed with Madoff’s operation. The charge carries a maximum sentence of five years jail under the Swiss penal code.
The Spaniard concerned is one of the most senior wealth managers known to be confronting criminal charges as a result of the Madoff scandal. Central to the case against him, as well as to accusations against Satander, is that investors were misled by false claims that adequate due diligence had been conducted on Madoff’s activities. As one legal observer notes, the court investigation will have to establish why people were closing their eyes and not asking enough questions.
The problem is, that’s what people do when things seem to be going smoothly and everyone’s happy with their return. The only solution is to have systems in place that set bells ringing that simply can’t be ignored. It’s dangerous to wait until suspicions are aroused, or intensify to the degree that action is imperative. Rather, it pays to bring in a team of professionals that can apply sophisticated methods of computer forensics and financial analysis to give you the early-warning system you can’t afford to be without. The technology involved and its reach will surprise you.
McKinsey Partner’s Arrest Spotlights White-Collar Crime
The elite US consulting firm of McKinsey & Company, long known for its prudence and caution, must have been low on anybody’s suspect list of those likely to be involved in financial crime. Even the suspect himself was shocked when federal officers arrived at his California home recently to arrest him on charges of conspiracy and securities fraud. As The Financial Times reported on October 22, Anil Kumar fainted and had to be briefly hospitalised. Court documents reveal that he has been accused of passing inside information to Raj Rajaratnam, head of the Galleon Group, arrested in New York last week on insider trading charges.
Shocks like this come out of a clear blue sky. As McKinsey’s worldwide managing director, Dominic Barton, has said, “This issue is completely virgin territory for us. We have very clear policies that you do not invest in clients or situations even where it is legal.”
There are, however, protective measures that firms can take. Experienced professional teams of experts exist that can apply sophisticated investigatory methods and state-of-the-art technology to warn top management of possible fraud. Tell-tale signs are often buried in patterns of contact and in other areas where no one else would think to look. Expert financial analysis, coupled with computer forensic work, for example, can usually provide you with a running image of what’s actually going on inside your company, much as infra-red night-vision goggles allow you to “see in the dark”. Without any support of this nature, you’re basically flying blind. Far better to be pro-active and not sorry.
McScam: Fast Food Customers Fleeced
Australia’s Daily Telegraph reported on October 21 that McDonald’s – the largest fast food chain in the country – will overhaul security on its EFTPOS machines after customers were stripped of $A4 million. Criminals had snatched the devices at McDonald’s outlets across the Western Australian state capital of Perth, a city of more than one million people, and replaced them with bogus card-skimming versions. This allowed them to fleece at least 3,500 customers. If you’re running a retail business make sure you not only have the appropriate security protocols in place but that you’re also in contact with a team of experienced forensic investigators who can ensure that your protective walls are not breached.
Police in Australia have recently warned retailers to be vigilant in maintaining their EFTPOS security systems. A top fraud squad officer in Western Australia has explained that the McDonald’s scam occurred when legitimate EFTPOS PIN pads were replaced by fake ones that transmitted PINs to the criminals. “It doesn’t take much time to switch these pads over,” he said. “Perhaps 15 to 20 seconds. It’s plug in and play.”
The most likely scenario in the scam is that McDonald’s staff were distracted while serving customers, with the bogus devices probably substituted at that time. A police taskforce has been established to specifically target the McDonald’s crime and it has warned retailers across the nation, especially in the largest state of New South Wales, to learn from the Perth experience and keep their terminals under constant and close scrutiny. No arrests have so far been made.
